Whether you are buying or selling a business, one of the most crucial documents you will require during the M&A process is a non-disclosure agreement (or NDA). In fact, it’s so vital that you won’t be able to start the acquisition process without one!
This document is particularly essential for sellers, as it protects the anonymity of your business and keeps the sale a secret until the deal has been completed. However, it’s also important for buyers as, once they have signed it, they will be privy to sensitive information regarding the operations of their acquisition target.
Of course, not all NDAs are the same, and if you are on the sell-side you have the power to negotiate terms and conditions that will guarantee the protection of your anonymity as well as various other aspects of the sale. Once your buyer signs, they are then bound by those terms. This is why it’s so important to ensure that your NDA is drafted correctly, as any mistakes or overlooked inconsistencies could spell trouble later.
With that aim in mind, let’s take a closer look at the various aspects of drafting and signing a non-disclosure agreement, so you know what to expect as you embark on the acquisition process.
Preparing an NDA
As we’ve already mentioned, an NDA (also sometimes known as a confidentiality agreement) is an essential document for any merger and acquisition and should be prepared and signed at the start of the process.
Doing so will ensure that all sensitive information that will be shared – from financial records to customer contracts – will be protected and not shared with anyone outside the transaction.
But what clauses should an NDA include? As a seller, here are some of the provisions that should be included in your confidentiality agreement.
- The document should define what constitutes ‘confidential information’ so there is no room for interpretation or error.
- It should stipulate the permitted usage of that confidential information. In the case of the M&A process, this usage will usually be limited to evaluating the suitability of the target.
- The buyer’s obligations.
- The terms of the non-disclosure agreement.
- The disclosure period.
- No obligation to proceed – just because a buyer signs an NDA, that doesn’t mean they will go ahead with the purchase, as they may discover that your business is not the right ‘fit’ for their portfolio after all.
- Enforcement of the agreement.
- Return or destruction of confidential information. This clause stipulates that the buyer must return or destroy any sensitive details they have been given if the transaction is not completed.
- Dispute resolution.
Benefits of NDAs for buyers
As well as the obvious benefits to the seller of a business, NDAs can also bring substantial benefits for the would-be acquirer. These include:
1. Protection of your own anonymity
This is probably rather obvious but if you end up buying a business then all the sensitive info relating to that business has been safeguarded by the NDA. This means that if any of your competitors considered buying the business before you snapped it up, they won’t be privy to that detailed information and, therefore, they won’t be able to gain any advantage over you.
2. You won’t lose valued suppliers or customers
Another significant advantage of the confidentiality agreement is the fact that no one outside the transaction – such as your new company’s trusted suppliers and loyal customers – will be aware of the change of ownership.
This can be a real boon, particularly given the fact that businesses will sometimes lose customers or suppliers when they change hands.
When and how to use an NDA
While we’ve already made it clear that NDAs pave the way for the acquisition process, the exact timing of their usage can vary depending on who oversees the transaction.
For instance, if a company decides to use an intermediary – i.e. a business broker – to manage the sale, the broker will usually prepare the NDA and ask buyers to sign it before even disclosing basic details such as the company’s name and precise location.
However, if a seller decides to manage the sale themselves, they may choose to negotiate and prepare the NDA once they have approached a few prospective buyers. Each would-be acquirer will then sign the agreement.
Depending on how things go, several buyers may end up signing before one decides to take the acquisition all the way through to completion. Others will drop out upon receiving the information memorandum and realising that the business is not as suitable for their portfolio as they thought initially.
Potential problems to be aware of
While non-disclosure agreements have featured in countless successful M&A deals, the fact is that issues can and do arise.
Here are some of the most frequently occurring problems with NDAs, so you’ll know just what to avoid!
1. Releasing too much too soon
You may have already identified one of the primary concerns regarding non-disclosure agreements: the fact that, once a buyer has signed one, they will gain access to sensitive information – and yet, they may end up choosing not to proceed with the deal.
The simplest way to solve this issue is to stagger the release of your company’s confidential details, so the buyer is not granted everything all at once after signing the NDA.
This method of proceeding means that the buyer will only gain full access to all pertinent – and sensitive – information when they have gone a fair way through the acquisition process.
2. Getting crucial details wrong
As a non-disclosure agreement is a legally binding document, it’s crucial that all names included in the document are written correctly. You may be unpleasantly surprised at the problems that can arise if a person or company’s name has been misspelt, particularly if the other party decides to dispute anything.
3. Being too vague
Another common problem with NDAs is the use of language, especially when it comes to defining what counts as confidential information. Being too broad or vague in your definitions can cause confusion and potentially even lead to the leaking of sensitive details to third parties.
How a business broker can help
As we’ve already mentioned, if you decide to hire a business broker to act as intermediary and oversee your sale, they will be in charge of preparing your NDA. This removes the task from your shoulders, leaving you free to focus on the sale process. Business brokers use NDAs for every transaction so they’re well-versed in preparing documents that will ensure your sensitive information is well-protected.
Not only that, but they will handle every other aspect of the sale, from vetting potential buyers all the way through to mediating negotiations and assisting with due diligence.
In short, if you want a streamlined and straightforward sale that includes the preparation of effective NDAs, then hiring a business broker is the ideal solution.
Call Harris Acquire today
If you would like to use a business broker for your upcoming sale then why not contact our friendly and experienced team at Harris Acquire? As well as providing NDAs to protect your privacy, we can oversee every stage of the M&A process on your behalf, so you can concentrate on preparing for your next chapter.
To find out more about our services, don’t hesitate to call us on 01926b 757100 or send an email to Hello@harrisacquire.com.
